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CA Intermediate · Auditing and Ethics · Completion and Review

While completing the audit of Bharat Engineering Ltd, the auditor accumulates identified misstatements. Management refuses to correct an uncorrected misstatement of ₹4 lakh that is individually below the materiality of ₹25 lakh, though several similar items exist in different accounts totalling ₹18 lakh. Performance materiality was set at ₹18.75 lakh. Considering SA 450, which response is most appropriate?

The auditor should evaluate the uncorrected misstatements in aggregate, considering their nature and circumstances, ask management to correct them, communicate them to those charged with governance and obtain a written representation. Items are not ignored just because each is below materiality, and materiality cannot be inflated to avoid modification.

  1. ATreat all items as trivial and ignore them since each is below overall materiality
  2. BEvaluate the aggregate effect of uncorrected misstatements, consider whether the nature and circumstances make them material, request correction, communicate them to those charged with governance and obtain a written representation on their effectCorrect
  3. CImmediately issue an adverse opinion because management refused to correct them
  4. DIncrease materiality to ₹40 lakh so that the aggregate falls below it

Explanation

SA 450 requires evaluating uncorrected misstatements in aggregate and in light of their nature and circumstances, not just individually against materiality. The auditor requests correction, communicates the uncorrected items to those charged with governance and obtains a written representation. Total ₹18 lakh is close to performance materiality of ₹18.75 lakh, so it needs careful evaluation. Revising materiality merely to avoid modification is improper, and an adverse opinion is premature without concluding they are material.

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